Given the sudden and significant market declines, it is important to assess all of the normal processes this year and ask whether ‘business as usual’ still makes sense in this environment. As a result, Semler Brossy Consulting Group is reconsidering all of the regular compensation action items for this year and highlighting key issues as they develop.
For companies with calendar-year ends, one of the next significant pay actions will be making stock awards to board members. Most companies have aligned the director stock award with the annual meeting date and typically divide the target grant date value by the closing price of the stock on the annual meeting date to determine the number of shares to award.
With the unprecedented and sudden decline in market values, this approach to calibrating director stock awards might raise some concerns this year. We have already received questions from many of our clients on some of these issues. Considerations include:
- Is it unfair if employees received their stock awards in January or February and now directors are getting awards at a much lower price?
- If we just operate business as usual and make grants at the annual meeting, will it look like we are getting a windfall benefit later in the year if markets recover?
- What is the dilutive impact of director grants now and how will this impact the available share pool?
- Does it just look wrong to be awarding equity now?
There is of course an argument to be made to practices consistent with an established policy and recognize that sometimes there will be a disconnect between the valuation of shares awarded to employees and shares awarded to the board. Indeed, we anticipate that many companies will not make any changes to their process for calibrating awards to the board of directors this year.
However, depending on the degree of price decline and other unique circumstances, there may be cases where an alternative approach is needed.
For those companies who are concerned about making director awards following a steep market decline, there are a number of alternative approaches to consider for ‘recalibrating’ grants this year:
- Use a trailing-average stock price for determining the number of shares to award (e.g., 90-day average). Using an average price avoids the appearance of market timing, although 90 days may not be enough time by the date of the annual meeting to avoid a potential windfall this year. An average of the price at the beginning of the year and the current price, or a 90-day average price as of fiscal year end, might be more appropriate.
- Use the same stock price to determine the number of shares to award to directors that was used to make management awards earlier in the year, assuming employee grants were made before the market selloff. This would put directors on the same footing as company executives and employees.
- Grant the same number of shares this year as were granted last year (or the same percentage of common stock outstanding if there have been material capital structure changes). s it simple and recognizes the complete unpredictability of the current markets.
- Potentially delay the awards or grant quarterly during the year to dollar-cost-average the grants. This might be more administratively complex than warranted given the issues, but could be viable in some circumstances.
Each company’s situation is unique and there is no one-size fits all approach, especially in the current environment of significant uncertainty. We are sure that many companies and directors have just not had the upcoming director awards top of mind, as there are certainly other priorities right now. However, as the annual meetings are fast approaching, now is probably the right time assess how you will make your director equity grants. Boards should not wait until the last minute to gauge the pulse of their members for the appropriate way to value stock awards for this year.
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